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US factories rebound, consumer sentiment shaky

US manufacturing grew in November at its quickest pace in five months, with a rise in domestic demand hinting that factories could provide a boost to economic growth in the fourth quarter.

Other data on Wednesday showed a drop in new claims for jobless benefits, although they remained elevated due to superstorm Sandy, and only a marginal improvement in consumer sentiment.

Financial information firm Markit said its US "flash," or preliminary, manufacturing Purchasing Managers Index rose to 52.4 from a three-year low of 51.0 in October. A reading above 50 points to growth in the factory sector.

Still, economists cautioned against taking the reading at face value as other gauges of manufacturing have looked softer, including readings for new orders and regional business sentiment surveys.

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"We're still not exactly going gangbusters," said Sarah Watt, an analyst at Wells Fargo in Charlotte, North Carolina. "The data point to modest growth."

Economists expect US economic growth will slow in the fourth quarter to a lackluster 1.6 per cent annual rate from a 2.0 per cent rate in the prior three months, according to a Reuters poll conducted on Nov. 15.

Some respondents in Markit's survey said efforts to rebuild after Sandy may have accounted for some of the increased demand.

The storm continues to make it more difficult to read the underlying health of the economy. Jobless claims surged after the deadly storm hit the US East Coast on Oct. 29 but last week retraced about half of that rise. Factory output and retail sales contracted last month, largely due to the storm.

Most of these effects are expected to be temporary, but even taking that into account, the US economy appears to be stuck in low gear. Europe's debt crisis is weighing on the global economy and US businesses appear hesitant to ramp up hiring and investment with the government on course to slash the country's budget deficit next year.

"Stripping out the short-term boost from Sandy ... and (factory) output is probably flat," said Paul Dales, an economist with Capital Economics in London. "That's unlikely to change much when the global economy is set to remain weak."

Through the eye of the storm

The Labor Department said initial claims for state unemployment benefits dropped 41,000 to a seasonally adjusted 410,000. Sandy had driven first-time filings up by 90,000 in the prior week.

Economists said that while the still-high level of claims reflected the storm's impact, it also likely pointed to more fundamental problems in the jobs market.

"There appears to be a noticeable deceleration of growth in the fourth quarter," said Peter Hooper, an economist at Deutsche Bank in New York. "It would not be surprising if some of the new jobless claims are due to underlying weakness," he said.

US financial markets showed little reaction to the data as investors focused on developments in Europe and trading slowed ahead of the Thanksgiving holiday on Thursday. US stocks rose, while Treasury debt prices were down modestly.

The claims report covered the same week when the Labor Department collects data for its estimate on hiring in November. It suggested that report, due on Dec. 7, could prove soft, although not all analysts expect a significant storm impact. Nonfarm payrolls grew 171,000 in October.

"We are expecting things to be in the neighborhood of what we have seen, maybe with a pullback in light of the hurricane," said Bricklin Dwyer, an economist at BNP Paribas in New York.

Consumer spirit

Growth in the US economy has looked uneven in recent months, with business investment sagging due to fears about U.S fiscal policy, while consumer spending and the housing market have shown some strength.

At the end of November, several months of improvement in US consumer sentiment stalled as uncertainty grew over whether lawmakers would steer clear of planned tax hikes and government spending cuts, a survey showed.

The Thomson Reuters/University of Michigan's final November reading on the overall index on consumer sentiment came in at 82.7, a touch up from 82.6 the month before, but down from a preliminary reading of 84.9 released earlier in the month.